Specific to Tesla, the size of our short position has ranged anywhere from approximately 2% of the fund (when I first put it on in the high $90s back in 2013) to as much as 1/3 of the fund more recently, when—in my judgement– the stock’s price went from “crazy” to “insane” and Tesla became “the greatest fundamental individual stock short opportunity I’ve ever seen.” However, despite my strong belief that Tesla is still “the greatest fundamental individual stock short opportunity I’ve ever seen,” in mid-June I drastically reduced the position size to a range of approximately 5% to 15% of AUM (depending upon technicals and news flow) and– despite the company’s ongoing disastrous fundamentals– shall only upsize the position (as a percentage of AUM) upon the appearance of what I judge to be “company killing” news; i.e., a major fraud indictment, a major safety recall accompanied by clear evidence of a company cover-up, a disastrous Elon Musk-related item, etc. Furthermore, if I happen to judge such news as “company killing” and yet the stock shows technical strength in the face of it, I shall again drastically reduce the position size. In other words, as a fundamental investor I’ve always adhered to the old adage to “respect the technicals but not defer to them,” but going forward with Tesla I shall defer to them…

Why haven’t I done this continually? Because Tesla isn’t a typical short position that I expect to decline “linearly”; rather, it’s a land-mine filled story-stock that could literally be cut in half overnight when one of those mines detonate and I’ve wanted to be sure to be there “in large size” when that happens. Well now we’ll be somewhat less likely to be there “in large size,” but if the equity component of Tesla is truly the “zero” that I strongly believe it is, there will still be plenty of money to be made in 100% downside from a stock that’s already been cut in half…
Many people have said to me “You’re 100% right about Tesla but it’s un-shortable.” Well, they’re all “un-shortable” on the way up! And as someone running a fund much larger than this one said recently: “If you wouldn’t short Tesla, what would you short?” This is a long-short fund and unfortunately during the latter stages of a bubble (when we swing from a long bias to a short one, as we’ve done now) we may go through this kind of pain prior to coming out successfully on the other side. I thus hope you’ll stick with me as I work to turn things around. And now onto the fund’s positions.

As noted at the introduction to this letter, we remain short shares of Tesla, Inc. (TSLA), this bubble-market’s largest individual bubble, as well as the operator of what may be the world’s least efficient car factory which—according tonew insurance industry data– produces cars that crash 37% more often than those of its competitors with overall losses that are 124% higher!

What else happened lately with Tesla? Well, there was this Tweet from Musk, endlessly repeated in the breathless fanboy media:

Having hinted in December that those same future Superchargers would be at least 350kw, let’s do some basic math: in sunny areas a highly efficient solar array generates an average of around 5 watts per square foot net over eight hours a day (assuming 9 watts peak and considerably less non-peak). This means that to run just one 350kw charger for eight hours a day would require 350,000/5= 70,000 square feet of solar cells, and to store enough power to run that charger the other 16 hours a day you’d need to triple that to 210,000 square feet, then add in 10% more for storage efficiency loss, thereby upping the requirement to 231,000 square feet. Thus, if this mythical Musk Supercharger station had six connections (the Tesla average) at 100% utilization, it would require approximately 1,386,000 square feet = 32 acres (!) of solar cells (plus room for all the batteries). And the cost? Well, existing grid-connected Supercharger stations seem to average around $350,000 each, so let’s start with that. Then add the necessary 6.3mW of solar capacity (350kW chargers x 6 x 3) @ $1.25/watt = $7.9 million, plus 33,600kWh of battery storage (350kw chargers x 6 x 16 hours/day) @ $250/kWh = an additional $8.4 million. So Tesla’s cost of each “disconnected” Supercharging station would soar from $350,000 to almost $17 million! Even if you cut the solar and battery capacity by 1/3 (assuming significantly less utilization), the per-station cost would still be over $11 million! Anyone who can’t see that Tesla’s CEO is full of shit (pardon my French!) is just a sucker at his poker table.

Also in June yet another Tesla “Head of Autopilot” departed (the second in six months). This apparently occurred nearly simultaneously with the departure of three other key people on the team and followed the escape of the “Head of Autopilot Hardware.” But then if you saw this (watch from 11:30) or this (watch from 3:35) video of the latest system, you’d understand why they’d depart before more Tesla drivers become “dearly departed.”

Then there was this hilarity (headline below), further proving that Elon Musk is simply allergic to businesses that make money:

And finally in June we learned that when you own shares of Tesla you’re investing with a CEO who jokes about Tweeting while mixing red wine and Ambien. It’s unclear whether this was “outright joking” or “confession time”; however, here are some Tweets (read them from the bottom up) from just two days ago– you decide:

Despite all the above-noted craziness, Tesla’s stock was up 6% in June (69% year to date) even though in May it reported a disastrous Q1 2017, with an operating loss of $258 million and a net loss of $330 million, while the market for its luxury EVs (Models S&X) is clearly saturated even before the arrival of next year’s competition from Jaguar, Audi and Mercedes:

Q3 2016 deliveries: 24,821

Q4 2016 deliveries: 22,252

Q1 2017 deliveries: 25,051

Q2 2017 deliveries: 24,000 (estimate)

In fact, Q2 2017 (the quarter ending June 30th) was headed for a much worse sales comp vs. the previous three quarters (and may still be, thanks to the disappearance of a major tax break in Hong Kong) when in a mid-April move of desperation Tesla slashed the price of the Model S75 by $7500 to $69,500 and in mid-May brought back free lifetime Supercharging for buyers with (easily found) “referral codes.” (Say hello to an instant 2% margin hit for that one!) Want to know how desperate Tesla is to move metal (and lithium)? Here’s a deal someone was just offered (on June 24th) for $10,300 off a BRAND NEW inventory car (a $9300 “adjustment” plus a $1000 “referral credit”) plus an additional $5000 off for deactivating the (so-called) “Advanced Autopilot.” (There’s much more about that technological abortion elsewhere in this letter.) To protect the salesperson (it’s not his fault he works for a CEO who swears they don’t discount new cars for “anyone”), I’ve removed the specific location and serial #:

And here’s a screenshot of a lot more brand new inventory from earlier this week; the starting discount is in the 2nd column from the right:

And here’s a new Seeking Alpha article about even heavier discounting! Considering that in Q1 COGS per car sold (not leased) would have been approximately $83,000 at an ASP of approximately $108,000 if adjusted for Autopilot revenue deferred from Q4 and the re-introduction of lifetime free Supercharging, it seems pretty clear that Tesla is now selling lots of Models S & X hoping only to make a small gross margin via the options. This does not bode well for the Model 3, which will supposedly start at $35,000. (I discuss this in greater depth below.)

And remember, in April Tesla’s “Supercharger moat” was definitively drained when Electrify America announced a charging network that will be both larger and faster. So the sole advantage Tesla had (easier but still klugey long-distance travel) over myriad soon-to-arrive competition will soon be gone.

Of course the “bright shiny object” now for Tesla shareholders is the “$35,000 mass-market Model 3” (with an estimated ASP of $43,000), and yet Tesla’s normalized gross margin of around 23% (for non-leased vehicles) on cars selling for an ASP of approximately $108,000 reinforces my old Seeking Alpha article’s claim that a $35,000 base-priced Model 3 can only happen at a massive per-car loss. A new report from UBS agrees, although it optimistically thinks a high-volume, well-optioned Model 3 may break even at $41,000. Although I think UBS is optimistic, for the sake of argument I was willing to assume it was correct and wrote an article for Seeking Alpha incorporating that information to explain why Tesla’s current $1 billion annualized operating loss will still worsen in 2018. Rather than repeating that explanation here, please do read the article.

Additionally, Model 3 sales (regardless of its profit margin) are likely to disappoint. In fact, I expect mass reservation cancellations to occur when the $7500 tax credit runs out by mid-2018. Just have a look at the Model 3 equipment level (compared to, say, a Honda Accord) and (in a new spyshot posted by the Tesla shills at Electrek.co) its incredibly cheap looking, glued-on iPad-like dashboard (with no gauges or head-up display):

Meanwhile, 2017 crash tests by the Insurance Institute For Highway Safety show the Model 3’s big brother the Model S (proclaimed by Musk to be “the world’s safest car”), falling short of a safety rating awarded to 42 other cars while analysis of data from the state of California showed that its autonomous driving system was statistically far behind most of the competition’s. Then the excellent investigative journalists at Daily Kanban proved that the videos Tesla put out promoting its new autonomous system were hugely deceptive. (And as noted earlier, most of the key people have left the program.) Then in May we learned that the CPU in Tesla’s hardware suite may be incapable of full autonomy despite Tesla charging $8000 up-front for that “future capability.” (Hello, “future class action lawsuit”!) Current Teslas also have no LIDAR and yet experts universally say LIDAR is required for full autonomy. So have a look at the “Autonomous Driving” links a few pages below (as well as the new video links earlier in this letter) and tell me how anyone with a brain in his head could seriously think Tesla is ahead of the rest of the industry in safe autonomy. Tesla also now faces significant class action lawsuits for sudden acceleration, and defective regenerative braking, as well as a slew of Model X lemon-law lawsuits. And how about all that great Tesla IP because, you know, it’s really a “technology company”? Oops… what IP?

I’ve argued for a while that the “Tesla love/loyalty” one reads about on the forums (“Even though my Tesla is in the shop a lot I’ll never go back to a regular car!”) and in the Consumer Reports owner survey is really “EV loyalty/EV love”—in other words, many people like the instant torque and quietness of their EV drivetrains, not necessarily the fact that their frequently repaired cars happen to come from Tesla equipped with the interior “luxury level” of a 1990s Acura. Here’s a recent study from McKinsey supporting this:

So when the Germans (Audi, Mercedes and Porsche) and Jaguar roll out their 300-mile luxury EVs beginning in 2018 they’ll capture a lot of Tesla owners who love Tesla’s driving experience but not its reliability or interior, especially as fear grows that Tesla’s cash bleed means it may not be around to honor the eight-year drivetrain warranty that those “reliability issues” force it to provide. (Tesla’s Model X has been a quality-plagued disaster, with Consumer Reports in November giving it an overall rating of 59 on a scale of 100—tied for worst among 16 competing vehicles in its class.)

In addition to its quality problems, the X’s multi-thousand-dollar premium to a comparable Model S sedan has helped result in hugely disappointing sales, as nearly all the luxury competition prices its premium SUVs considerably less expensively than its premium sedans. For instance, the most basic “X” with no options and a warm-weather range of just 237 miles (well under 200 miles in cold weather) starts at $82,500 with only five seats standard. By comparison, the Porsche Cayenne starts at $60,600, the Audi Q7 at $49,000, the BMW X5 at $56,600, the Volvo XC-90 at $45,750, the Jaguar F-Pace at just $41,990 and the seven seat Mercedes GLS at $68,700, and all those vehicles average more than twice the range of the Tesla with far more flexible refueling capabilities for long trips. And as noted earlier, the upcoming pure electric “crossovers” from Jaguar, Audi and Mercedes are all expected to price at least $15,000 cheaper than the least expensive Model X.

Meanwhile, the heretofore revered Model S is now on the Consumer Reports“Used Cars to Avoid” list with “much worse than average reliability” (although the new models have improved to “average”). On the bright side though, Tesla owners get to make lots of new friends at their local service centers, assuming they don’t mind the month-long wait times for an appointment.

So in summary, Tesla is losing a massive amount of money even before it faces a huge onslaught of competition (and things will only get worse once it does), while its market cap now exceeds those of Ford and GM despite a billion-dollar annualized operating loss selling just 100,000 cars while Ford and GM make billions of dollars selling 6.6 million and 9 million cars respectively. Thus this cash-burning Musk vanity project is worth vastly less than its nearly $70 billion fully-diluted enterprise value and—thanks to its roughly $8 billion in debt—may eventually be worth “zero.”